Qwest bonds gain on completion of debt swap; Charter off as heads roll

By Paul Deckelman and Paul A. Harris

New York, Dec. 23 - Qwest Communications International Inc., bonds were quoted higher Monday, after the company announced the completion of its controversial debt exchange offer; Qwest said that it managed to cut its overall debt load by about $1.9 billion with the offering.

On the downside, Charter Communications bonds took a tumble as the troubled St. Louis-based cabler operator announced the firing of two senior executives, chief financial officer Kent Kalkwarf and chief operating officer David Barford, who had been placed on paid leave several weeks ago.

With primary market activity essentially on hiatus for the remainder of the year, the secondary was where it was at on Monday, even though traders there noted that apart from movement in the bonds of companies having news out, such as Qwest or Charter, things were dreadfully dull.

"Merry Christmas," quipped one. "Today was a waste of a clean shirt."

Still, he saw Qwest bonds having "moved up a few points," with the benchmark holding company 7½% notes due 2011 advancing to 66 bid from 62 previously, after the Denver-based telecommer announced that it had "successfully completed" its much-criticized debt swap, even though only about $5.2 billion face amount of the company's bonds had been tendered under the offer, which Qwest had originally envisioned as taking out as much as $12.9 billion of existing debt (see "Tenders and Redemptions elsewhere in this issue for full details).

Qwest said it would issue $3.3 billion of new debt to be distributed to the tendering holders; not only does the new debt have substantially higher coupons than all of the bonds that are being taken out, but it ranks higher in the company's capital structure.

Many bondholders had objected to the debt deal, which was announced last month, contending that it was inadequate and coercive, since noteholders were being asked to take a substantial haircut (ranging from 17% to 45%) on the principal amount of debt they were being asked to give up.

But their legal efforts to block the debt exchange ran aground last week, when a federal court in New York declined to block the debt swap from going ahead, which in turn forced the plaintiffs to drop their suit against the debt deal.

At another desk, a trader said he had not seen the existing Qwest debt trading around that much, but said that the new Qwest Services Corp. 14% notes due 2014 were being quoted trading at 109 on a when-issued basis (the bonds are scheduled to officially be distributed to tendering noteholders on Thursday. He saw the new Qwest Services 13.5% notes due 2010 at 106 when-issued, and guesstimated that the Qwest Services 13% notes due 2007 were around 104.5 when-issued.

Qwest shares were up 39 cents (7.36%) to $5.69, on New York Stock Exchange volume of 13.4 million shares, up from about 8.5 million shares usually.

Elsewhere, Charter' bonds "fell out of bed," the trader said, quoting its 8 5/8% notes due 2009 as having dropped to 44.5 bid/45.5 offered from 49.5 bid/50.5 offered.

Another trader saw Charter's 8 14% notes due 2007 having moved as low as 42 bid/44 offered from 49 bid/50 offered before. Charter's zero-coupon/9.92% notes were seen as low as 35.5 bid, down from 39. Charter shares lost two cents (1.8%) to end at $1.17.

Charter said that the firings of Kalkwarf and Barford followed a review by the company "of various matters, including those relating to the previously disclosed Grand Jury investigation." The grand jury is looking into possible irregularities in the company's accounting practices.

Charter said further that it had been advised by the U.S. Attorney's office in St. Louis that no member of its Board of Directors, including the chief executive officer, is a target of the investigation, and said it was actively cooperating with the probers. Charter also said Monday that it is proceeding with the re-audit of its 2000 and 2001 financial statements.

Charter said that Steven A. Schumm, its executive vice president and chief administrative officer, has been named interim CFO in place of Kalkwarf. Margaret A. Bellville has been named Executive Vice president and chief operating officer in Barford's place.

News of the executive shake up, "while not a pleasant announcement right before the holidays, was not completely unexpected," said high yield cable and media analyst Aryeh Bourkoff at UBS Warburg. He predicted that the management changes would likely continue in the new year, "as the company tries to right its operations."

Bourkoff also said that a financial restructuring by Charter would be necessary in 2003, "to gain financial flexibility to better compete with its satellite competitors.

In addition to the personnel changes, Charter further said that it presently anticipates the fourth quarter revenue growth to be at or near the low end of its prior revenue guidance of 8 to 9%, and warned that fourth quarter operating cash flow to be less than previous guidance.

The re-audits of 2000 and 2001, as well as the audit of 2002 results, are expected to be completed in the first quarter of 2003. Accordingly, Charter said that it is not planning to provide further specific guidance until the completion of its 2002 audit.

A trader said the bad news from Charter, the third-largest U.S. cabler, put downward pressure on some other bonds in that sector, with Cablevision's 7 5/8% notes due 2011 at 92.5 bid;/93.5 offered and Mediacom LLC's 11% notes due 2013 at 100.5 bid/101.5 offered, both a point lower.

XM Satellite Radio announced financial transactions aimed at shoring up its liquidity totaling $450 million, in $200 million in new financing from an investor group that will buy new 10% senior secured convertible notes, and $250 million of payment deferrals and related credit facilities from General Motors Corp.

XM's shares were up 19 cents (6.33%) to $3.19, but its 14% notes due 2010 were seen unchanged, at 53, "because nobody was around to trade them," a market observer said.

In announcing the new investment and the concessions from General Motors, XM also said that it plans to soon launch an exchange offer and consent solicitation, under which it will seek to exchange at least 90% of the outstanding $325 million of the 14% notes for new 14% senior secured discount notes due Dec. 31, 2009, warrants to purchase common stock and cash.

Standard & Poor's said it views the terms and nature of the exchange offer "to be tantamount to a default," and cut the Washington-based satellite radio broadcaster's corporate credit to CCC- from CCC+.

S&P analyst Steve Wilkinson further wrote in his downgrade message that "although the exchange offer will not alter the principal value of the notes or the interest rate, it will require noteholders to defer cash interest payments for a period of time, which is considered a material concession."

Outside the communications sphere, FelCor Lodging's 7 7/8% notes due 2007 dropped a point to 94.5 after the Irving, Tex.-based hotel industry Real Estate Investment Trust lowered its fourth-quarter guidance, saying that growth in revenue per average room - the key measure of lodging industry financial performance - will likely be below its previously announced 4% to 6% range.

FelCor said that RevPAR increased 5.2% in October - but that slid to 1.7% in November and is expected to be only "slightly positive" for this month.

FelCor shares retreated 24 cents (2.24%) to $11.78%.

Back on the upside, Continental Airlines' 8% notes due 2005 were quoted up five points, to close at 55.5 bid, though with no fresh news seen on the Houston-based air carrier.

The high yield market, along with other U.S. debt markets, will close early at 2 p.m. ET on Tuesday, and will be completely closed on Wednesday. Activity is expected to be light Thursday and Friday, even though full sessions are on tap.

Monday produced a dead quiet session in the primary market. News sources, with few exceptions, seemed out of reach.

Jacques Cornet, who was recently named head of CIBC World Markets' global high yield research, told Prospect News on Monday that given the see-sawing funds flows during the last half of 2002 it is tempting but probably inaccurate to try to read portents into the most recent fund flows picture.

With the $341 million that was reported to have flowed into high-yield mutual funds for the week ending Dec. 18, nine of the past 10 weeks saw inflows totaling just over $5 billion. The only exception occurred for the week ending Dec. 11 during which $400 million was reported to have flowed out of the funds.

Buy- and sell-side sources have been divided into two broad camps, one of which holds that the funds flows picture for the latter half of 2002 can be explained by investors who have been attempting to time the market, while the other camp points to returns and maintains that high yield on a comparative basis remains an attractive asset class.

Cornet told Prospect News on Monday that 10 weeks of fund flows won't really provide a reliable indicator as to whether money will continue flowing into high yield.

"I think it's tough to argue that this is a secular change, that this is a sustainable level of inflows," Cornet said.

"Ten weeks does not make a trend. You have to look at the inflows over a much longer period of time to determine a trend.

"Investors for the most part are trying to move toward more conservative vehicles," the new head of CIBC high yield research added. "They are looking at asset classes where you can generate some level of protection of principal. Historically you would say that in the high yield market it doesn't make much sense because protection of principal hasn't really worked.

"But I would argue that over the last three years the issue with principal erosion is primarily focused on a few industries, such as telecom, technology and utilities.

"I think if the market has learned anything from what's gone on over the last three years it's that safety of principal is clearly something they have got to deal with. And I think they're beginning to attract funds on that premise, relative to the equity markets: if folks can get an 8%-10% return per year, and have some assurances as to principal risk I think they take that as opposed to having WorldCom equity go from 95 to zero.

"I think it's indicative of the risk tolerance of our markets today. I don't think there is a high risk tolerance."

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